The world economy also needs gains in productivity

Market outlook
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12/15/2016

Productivity must increase in order to drive global economic growth in 2017 and in 2018. This is one of the conclusions of the second issue of "Macroeconomic Forecasts" which the Edmond de Rothschild Group is publishing today. This bi-annual publication, which is overseen by the Group's Chief Economist, Mathilde Lemoine, analyses macroeconomic dynamics and sets out the outlook for 2017 and 2018.

The strategic issue for 2017: Sustainably higher growth and inflation

Increased global growth is expected in 2017 and 2018, entailing heightened liquidity, more expensive oil, and the return of budgetary policies. The election of Donald Trump as US President is expected to translate into a lasting increase in inflation and sovereign yields. Geopolitical uncertainty and upcoming elections could, however, limit the driving effect of budgetary policies on private investment.

The United States, the eurozone and Asia are developing their own mechanisms

In the United States, the drop in taxes and increase in federal government spending promised by D. Trump are expected to translate into a more sustained growth (2% growth in 2017, 2.3% in 2018) and into a rise in inflation. However, so long as these measures have not been implemented, the strengthening of the dollar and the rise of sovereign funds could be a drag on US growth in the first half of 2017. Despite the protectionist statements made by D. Trump, it is highly unlikely that all of his measures will be put in place. The forecasting model used for this study takes into account reprisal measures which could potentially be taken by certain trading partners of the US, such as China. In the eurozone, the growth projected for 2017 is 1.6%, in other words the same as that in 2016. Budgetary expansionism may not be sufficient to offset the negative effects of electoral uncertainty on private investment and the increase in the price of oil is expected to slow household spending. The European Central Bank should continue to support the real estate market and internal demand. Furthermore, Brexit is expected to continue to be a problem mainly restricted to the United Kingdom, where flat growth is expected in 2017. In emerging markets, sustained growth is projected (4.7% in 2017 and 4.5% in 2018). These economies should, in particular, benefit from an increase in the price of raw materials. However, growth in these markets is expected to be restricted by insufficient increases in productivity gains.

Inflation must go hand-in-hand with productivity gains to drive growth

Recent developments in the US have given credence to the theory that deflationary pressures and low rates are now behind us. On a global level, central banks have demonstrated their ability to act and their willingness to always go further. In 2016, in addition to their direct interventions, they also increased the size of their balance sheets, which translated into a rise in global liquidity by 21% in the first half of 2016. In addition to these monetary measures, the governments of the G20 countries also committed to implementing budgetary policies to revive their growth. Lastly, the OPEC meeting held on 30 November is expected to translate into an increase in the price of oil. These factors should feed into short- and long-term inflation. While inflation can be the sign of healthy markets, growth in productivity is nonetheless necessary to prevent inflation eating into purchasing power and in order to prevent inflation limiting the negative effects of ageing on potential growth. Such growth in productivity currently appears more likely to take place in the US than in the eurozone, where upcoming elections are expected to put a brake on the will to implement structural reforms. Failing which, without productivity gains, price increases may give rise to a drop in households' purchasing power, an increase in companies’ production costs, and consequently to lower growth.

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